Central Banks: Blockchain Will Overhaul Securities Settlements

The European Central Bank and the Bank of Japan have released a joint report claiming that distributed ledger technology (DLT) can generate new securities settlement mechanisms, such as “cross-chain atomic swaps” among unconnected ledgers.

DLT’s Impact On Securities Delivery

Project Stella, the banks’ DLT research project started in December of 2016, was designed to participate in the broader debate about DLT’s usability. This portion of the banks’ project examined the delivery of securities compared to cash and how it could operate in a DLT environment.

The new report addresses what’s known as the deliver versus payment (DvP) method of securities settlement. Under DvP, the transfer of one asset executes only if the other asset transfers. The dual transfer is referenced as “atomicity.”

The project researchers created prototypes based on the Corda, Elements and Hyperledger Fabric platforms. The researchers discovered that DvP can execute in a DLT system with cash and securities between separate ledgers and on a single ledger.

Cross-Border Delivery Minus Link To Individual Ledgers

Experiments and conceptual analysis have both demonstrated that cross-border DvP can occur without any link connecting individual ledgers. This scenario does not occur in the current method, the report noted.

The cross ledger DvP systems can bring operational challenges to settlements, the report noted. DvP exchanges among unconnected ledgers will require several interactions between buyer and seller, the report further noted.

The system can also impact the speed of the transaction, requiring liquidity to be temporarily blocked. The lack of synchronization in the system can leave participants exposed to principal risk in the case where one counterparty in the transaction fails to complete all the steps in the process.

A report on the project last September noted that technology is not prepared to replace existing settlement systems.